Investors Bancorp Is Continuing Its Growth Course

| About: Investors Bancorp, (ISBC)

Summary

Investors Bancorp, Inc. (NASDAQ: ISBC) grows by acquiring smaller community banks.

The bank is a very well run and profitable. It has much more equity than required by the current bank regulations.

The bank's performance is increasing while its stock valuation is close to a five-year low, so investment in ISBC is a risk worth taking.

Investors Bancorp, Inc. (NASDAQ: ISBC) attracted my attention with its series of acquisitions of smaller community banks and rapid growth. In the past several years, ISBC has bought eight banks, e.g., Gateway Community Financial Corp in 2014, Roma Financial Corporation in 2013, Marathon Banking Corporation, and Brooklyn Federal Bancorp in 2012.

A new acquisition was announced on May 4, 2016. ISBC is acquiring the privately owned Bank of Princeton for about $154 million in a cash/stock deal. This acquisition will add 13 branches in the greater Princeton area, $1 billion in assets, and $820 million in deposits to ISBC.

The purpose of this most recent acquisition is to gain new scale in New Jersey markets and to expand the bank's presence into Princeton and Philadelphia, gaining access to customers in the education, healthcare, and government sectors.

Investors Bancorp, Inc. is the holding company for Investors Bank. Investors Bank is a New Jersey-chartered savings bank. On December 31, 2015, it had 140 branches, $20.89 billion in assets, $16.66 billion in loans, and $14.06 billion in deposits. The bank operates in New Jersey and the greater New York metropolitan area.

The bank has 3.96% of the total deposits in the State of New Jersey and one of the largest depositors for government and municipal deposits in New Jersey.

The total assets, deposits, loans, and net income have increased over the years. The historical data are provided in the chart below.

The performance ratio that is used for the banks has improved as well (see chart below).

The average equity to average assets is high and is equal to 17%. The development of this ratio is provided below.

Stock performance

Analyzing the performance of the stock since May 2011, it should be noted that the stock price grew from $5.20 (adjusted price) on 13 June 2011 to $11.60 on 13 June 2016 at the compounded growth rate of 17.4%.

ISBC Chart

ISBC data by YCharts

Valuation

The current price to earnings ratio is 21.16 which are just above the five-year minimum of 18.2. The 5-year average is 24.7.

ISBC PE Ratio (Annual) Chart

ISBC PE Ratio (Annual) data by YCharts

The stock's attractiveness is evaluated using a simple method. The estimates for three future years are taken and then multiplied by the P/E ratio for the stock that it is believed to be in the market for the particular stock in question. To simplify the calculations, the P/E ratios of the past five years are used: the minimum and the average of the previous five years, and compared with the average for the industry. Only if the estimated stock price implies the 15% annual return, the stock is considered for investment.

According to the FactSet database, the estimated EPS for 2015-2018 is as follows (in ):

2015

2016

2017

2018

EPS estimate

0,52

0,58

0,68

0,76

EPS growth rate

11,5%

17,2%

11,8%

Stock price using min P/E of 5 years (18.2x)

10,56

12,38

13,83

Stock price using average P/E of 5 years (24.7x)

14,33

16,80

18,77

Implied annual return

45.9%

26.7%

20.6%

Conclusion

The bank is well-run and has more capital than required by the regulations. The excess capital will be used for more acquisitions if such opportunities will occur, or it will be used for share buybacks. I have no doubt that the ISBC will continue to grow via acquisitions of the smaller banks in one of the best areas in the US, i.e., New Jersey, New York, and Philadelphia. I believe Investors Bancorp, Inc. will reach $30 billion in assets in a couple of years.

The valuation looks attractive taking into account that most bank performance ratios have improved over the years, and the valuation has close to 5-year lows.

Interestingly, one of the oldest behavioral funds in the market, Undiscovered Managers Behavioral Value Fund (UBAX), is a significant shareholder of Investors Bancorp, Inc., having 4.37% of ISBC shares. This fund invests in stocks based on behavioral finance theory, where the share price reflects the market's overreaction to old, negative information about a company and its underreaction to new, positive information. The fund seeks companies with below average price-to-earnings ratios or decreasing stock values. Investors Bancorp, Inc. is the biggest investment in UBAX's portfolio.

This fund is sub-advised by Fuller and Thaler Asset Management. One of the company's founders, Richard H. Thaler, is a well-known American economist and professor of behavioral science and economics at the University of Chicago. He is known as a theorist in behavioral finance and a collaborator of Daniel Kahneman.

UBAX's investment indicates that ISBC is undervalued.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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